Microsoft results could show weakness in license plans

An unexpected large drop in Microsoft’s unearned revenue has financial analysts worried that the company’s biggest challenge is not Linux or an IT spending dip, but an installed base that’s rejecting its software subscription plan.

The drop in unearned revenue overshadowed Microsoft’s strong fiscal first quarter performance, with earnings above Wall Street expectations.

Unearned revenue is deferred revenue for license agreements that is recognized over the life of those agreements. The amount of unearned revenue on Microsoft’s balance sheet dropped US$768 million. This is significantly more than the forecasted decline of between $200 million and $300 million.

Microsoft blames the drop on slower sales due to a reorganization in its Business Solution sales force, sluggish IT spending and seasonal factors. Also, the company was distracted from selling software subscriptions because of security issues such as the Blaster worm, Chief Financial Officer (CFO) John Connors said Thursday in a conference call.